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Term life insurance is typically purchased to protect a growing family from the catastrophic loss of a “breadwinner”. Lower initial premiums offer the flexibility to fit immediate needs. However, over time, a more permanent and valuable life insurance contract may be needed to help provide security and the potential for more stable premium payments for the future.

Term life insurance is generally the lowest premium per thousand insurance (but not always, see this covered in the Universal Life and Term to 100 areas). You often hear terms of premium guaranteed for such as one year, five year, ten year, twenty year, etc. After the guarantee period, if the policy is renewable, you will see steep increases in premiums. The danger with this strategy is the possibility you may not be insurable at the end of the fixed premium term and coverage could lapse if not converted (if available) to another plan offered by the insurance company.

Term insurance is often compared to renting; you do not generally gain any equity, cash value or the actual number of term policies that pay a death benefit is very small, less than about 5% because these are often not held for long periods of time, or they have lapsed before the death benefit is payable.

Term life insurance covers the insured for what is usually a relatively short period of time. All of the money from the premium is used to pay for the insurance itself. Therefore, at the end of each term, the policy must be renewed. The policy does not accrue cash value or equity for the insured, so there is no penalty for not renewing a term life policy because the insurance company is not in possession of an asset. If the insured dies during the term of the policy, the policy pays off at its face value. Term life policies dead benefits are generally tax-free and may even allow for a partial payout upon diagnosis of a terminal disease, this applies also to whole life policies.

For young people, term life insurance is often the cheapest option. However, the price will increase as you age because health problems show up over time, and, for the simple reason that the older you are, the higher the chance that the insurance company will have to pay a settlement. Another downside is that if health problems materialize and your policy is non-renewable, your premiums may increase or you may no longer qualify for insurance. This problem can sometimes be avoided by paying higher rates for renewable term life, allowing you to renew the same policy without re-qualifying. A policy may also be designated convertible, which means that the insured can convert the policy to a permanent life at a later time.

Another choice related to term life is the option for level or decreasing term. Level term pays the same amount of money upon death at any point during the policy. Decreasing term pays less and less as the term progresses. The latter is most effective for protection against a mortgage or any other steadily decreasing financial obligation. Level term life is not to be confused with level premium term life, which specifies that premiums will not increase over the course of the term in exchange for slightly higher premiums early in the term.

People choose term life when they need insurance for only a short period of time, or they need insurance, but cannot afford the premiums associated with permanent insurance.

The purpose of this insurance is usually for a short term or temporary need (to age 55 or 65 while the family is growing up and you are saving for retirement. It is to provide cash in the event of your death.

So those who depend on you will have the money to:

• Settle your debts, mortgages, loans (business & personal), remove guarantees, and make up for the income you provided to the family, Remember the impact of inflation when doing this calculation. At 3% inflation, a need to supplement income by $25,000 will grow to $50,000 in 24 years.
• Provide for children’s education, marriage etc.
• Complete the funding for your spouses retirement plan – very important and why many need some term insurance to age 65 – this can also be a consideration for those looking for permanent insurance as well.
• For businesses, it can be to fund a buy/sell agreement or to provide insurance on a key employee to provide cash to find a new person, absorb the financial shock of the loss and have additional funds to pass on to the family.

You can see the temporary nature of this insurance. It has a specific relatively short term purpose which will no longer apply by at least age 65. This insurance can be very inexpensive for the amount you are purchasing ($1 million can cost between $60 and $100 per month depending on age, sex and smoking habits) because most people will never collect it. It is purchased to cover you life when you are relatively young and the need is frequently gone by age 55 or age 65 for some of those concerned about saving for retirement.

It generally comes in 5, 10, 15, and 20 year terms. This means that the premiums are guaranteed for that period of time and they will automatically renew at a higher rate for the next term period. For example, a 10 year term policy has guaranteed rates for the first ten years and then you can renew it for another ten years without a medical at a set rate contained in the policy. Do not renew it if your health is good as the renewal rates can be 25% to 100% more than the premiums if you shop around for a new policy. The assumption is that you only renew if you are too sick to get a new policy.

Saving Tip 1: renewable & convertible policies – Over half the people renew term insurance and pay these high premiums, – get a new policy, with preferred term rates it might be less than you were paying. At one time, insurance premiums were divided into smokers and non smokers. However, the companies now have statistics that enable them to determine those who are least likely to die based on lifestyle, family history and blood pressure and some measurements they get from blood samples, such as cholesterol levels. About half the people will qualify for a preferred rate. At the time of this writing, a 35 year old should be able to purchase $500,000 for about $35 per month at regular rates but preferred rates would be in the $25 per month range. Some companies also offer a preferred smoker rate for those who would qualify for a preferred rate but they smoke.

Finally, there is the issue of convertible. You will see most policies are renewable which means you can renew them for another term of say 10 years and convertible. Convertible means you have the right to convert all or part of the policy to a Permanent Policy at any time during the term without a medical. You just pay whatever the rates are at the time of conversion. If you policy was issued on a preferred basis some allow you to convert on a preferred basis if they have preferred universal life insurance rates. This is an inexpensive option that is usually built into the policy cost and worth the extra price. A few companies will offer policies without this conversion option for a small savings.

Saving Tip 2: If you are a smoker of cigars or enjoy a pipe, some companies will consider you to be a non smoker. Make sure you get this rate.

It is not expensive to move the financial risks to your family at your death to an insurance company and it is the responsible thing to do.

The low premium cost/high death benefit of term insurance is its most attractive feature. However, typically, term insurance premiums continue to rise with age. Some term contracts do offer premiums that remain level for a pre-determined number of years, but these contracts can experience significant premium increases in the future, or death benefits that decrease yearly. A policy that has long-term value and benefits, and the flexibility to help cope with change, is important. Therefore, converting a term policy to a permanent contract may make sense depending on your needs.

Converting your term policy to a permanent life insurance contract may be important to your overall financial program depending on your goals and objectives. Like term insurance, permanent insurance provides a guaranteed death benefit, backed by the issuing insurance company. There are also some other appealing benefits with permanent insurance:

• Premiums can remain level for the life of your policy.
• A portion of your premiums accumulate tax-deferred (cash value) and can be borrowed at favorable rates or withdrawn*. Or you may take a loan from a bank with the policy being the collateral.
• You can use the policy’s underlying cash values to help supplement retirement, college expenses, or other future cash needs through the aforementioned loans and withdrawals.

The conversion privilege in most term policies offers those who cannot initially afford permanent insurance a great opportunity to convert to

a permanent contract at a later date. Some term policies may offer a conversion credit that makes converting to permanent even more economical.

One particular advantage of converting from term to permanent, rather than purchasing a new permanent policy, is that there is no need for medical or financial re-qualification. (Note: This holds true if coverage amounts are to remain the same. If coverage is increased there may be a need to provide additional medical and financial information).

Converting your term insurance to a permanent contract may help provide additional security and protection. You may be comfortable knowing that the contracts death benefit will be there to help to provide for your family in the event of your untimely death. In addition, you may feel a great sense of confidence knowing your premiums have the potential to build on a tax-deferred basis that may be important in the years to come. While this approach may not be for everyone, it is always wise to review all your insurance options. Delsan Group can help you determine if converting an existing term policy to a permanent policy makes sense in your situation.

*Keep in mind that loans and partial surrenders from a life insurance contract will reduce the contracts death benefit and cash value. In the case of loans, interest will be charged on the amount borrowed.

Most insurance policies contain exclusions, limitations, reductions of benefits and terms for keeping them in force. Your Broker at Delsan Group will be glad to provide you with costs and complete details.

If you are in Quebec, email us at broker@delsangroup.com with your date of birth, sex, smoker or non, and amount you would like us to quote on and we will get back to you.

Delsan Group is there for you, to serve your needs in financial services, financial security and advice.

For more information, contact the Delsan Group.